An agenda for capital markets union November 2014 Association for Financial Markets in Europe www.afme.eu About AFME The Association for Financial Markets in Europe (AFME) is the voice of Europe’s wholesale financial markets. We represent the leading global and European banks and other significant capital market players. We believe that liquid capital markets and a well-functioning banking system are central to any successful modern economy. We advocate stable, competitive, sustainable European financial markets Focusthat support economic growth and benefit society. Expertiseon a wide range of market, business and prudential issues Strongdeep policy and technicalrelationships skills Breadthwith European and global policymakers Pan-Europeanbroad global and European membership organisation and perspective Global reach via the Global Financial Markets Association (GFMA) Capital Markets Union An agenda for capital markets union Contents FOREWORD ........................................................................................................................................ 2 1. EXECUTIVE SUMMARY ............................................................................................................ 3 2. GOALS FOR A CAPITAL MARKETS UNION ........................................................................ 5 Defining the capital markets union ...................................................................................................................... 5 The international dimension to capital markets union ............................................................................... 8 Building CMU through a better regulation approach ................................................................................... 8 3. THREE PILLARS OF CAPITAL MARKETS UNION ......................................................... 10 More efficient and liquid markets for issuance of financial instruments ........................................... 10 Harnessing long-term savings to promote investment ............................................................................. 13 Open, integrated capital markets infrastructure .......................................................................................... 16 4. INSTITUTIONAL FRAMEWORK FOR CAPITAL MARKETS UNION .......................... 19 CMU and the Single Market ................................................................................................................................... 19 CMU and banking union .......................................................................................................................................... 19 Supervisory convergence and the role of ESMA ........................................................................................... 19 ANNEX 1. OVERVIEW OF INITIAL AFME PROPOSALS TO PROMOTE CMU ................. 21 ANNEX 2. COMPARATIVE DATA ON EU AND U.S. CAPITAL MARKETS ......................... 22 ANNEX 3. OVERVIEW OF EU LEGISLATIVE BASE FOR THE CAPITAL MARKETS ...... 25 Page 1 Capital Markets Union FOREWORD For Europe, capital markets union is the right project at the right time. We are delighted that European Commission President Juncker has identified CMU as a flagship initiative for his five-year mandate. We also welcome the inclusion of the project in the brief of Commissioner Hill as part of the wider financial services portfolio. The EU is facing a growth crisis: output is flat, unemployment remains high and investment is falling. What Europe needs is a new growth model to put underemployed resources – labour, capital and entrepreneurship – to work, to generate jobs and growth for citizens across the continent. The financial sector can and must play a central role in this economic revitalisation, through a successful capital markets union. But clearly we will need a growing economy to gain the full benefits of CMU. Strictly, CMU is not a new project. A single EU financial market was already a goal of policy prior to the Single European Act. To this end, much has been tried in Europe, much has been achieved, but more remains still to do. Policymakers should think about CMU as at least a 5 year project, and they should identify clear economic goals that they want it to achieve. In this paper we propose just such a set of firm, measurable targets – most notably, to increase the capital markets’ share of debt financing by at least 10 percentage points over the next 5 years. In defining its ambition, we ask the Commission to consider the goals we have proposed for CMU. For each individual action that is proposed under capital markets union, we must ask: will it promote investment and growth? There is already a long list of potential policy options for CMU and it will be crucial to make the right choices based on good evidence – in order to develop a targeted, strategic agenda of high impact interventions. We would encourage the Commission to take the necessary time to build the evidence base and refine the policy agenda. AFME and its members will offer all the support we can, and we will also examine where industry itself can deliver positive change. Europe’s financial sector is still rebuilding after the crisis. Furthermore, while regulatory reform has made the financial system much safer, it has also reduced the capacity to fund growth, both through banks and the capital markets. Advancing CMU in this environment will not be easy, but it is achievable. However, Europe should not have to also contend with a new financial transaction tax and further banking structure reform – both of which would fragment markets and reduce liquidity. We call on the Commission to demonstrate an unequivocal commitment to capital markets union and to jobs and growth by reassessing its position on both files and taking the FTT in particular off the table. Over the next five years AFME is committed to helping Europe’s policymakers achieve a capital markets union. If we can forge a strong, positive partnership to deliver CMU then the rewards for Europe will be substantial: deeper, more diverse capital markets; a more stable financial system; and above all, new businesses, new investment and new jobs. Capital markets union is an exciting opportunity which we must seize. Simon Lewis Chief Executive, Association for Financial Markets in Europe 2 Page 2 Capital Markets Union 1. EXECUTIVE SUMMARY As the voice of Europe’s wholesale financial markets, AFME is committed to supporting the Commission’s initiative on building a capital markets union. The CMU process should examine legislative and regulatory issues, market impediments and business practices in the EU28 in order to identify the key steps towards an open, efficient framework for all types and sizes of corporate issuers and investors. We propose that the work programme for CMU is organised under three pillars, covering: • issuance of capital market instruments (the supply side); • long-term investment in the capital markets (the demand side); and • infrastructure for capital markets issuance and trading. Economic ambitions for a capital markets union In comparing the current state of development of European and U.S. capital markets, we must acknowledge some essential structural differences in Europe – notably the diversity of currency, economic policies, tax rules, language and regulatory structures. Based on the current stage of development of EU capital markets we consider that a realistic aim for the five-year horizon of the CMU initiative would be to increase the overall share of debt financing from the capital markets in Europe by 10 percentage points, from 25% of the total to at least 35%. In pursuing such a target the Commission should consider the case for setting objectives for expanding specific product markets over the next five years; for example: • increasing Europe’s stock market capitalisation from around 75% of GDP currently to 100% of GDP, as the Federation of European Securities Exchanges has suggested; • at least doubling European issuance volumes of securitisation and private placement by encouraging greater participation by both bank and non-bank investors; and • increasing the share of capital market funding of SMEs, through both equity and debt. There is a critical link between primary and secondary markets, as the efficiency and depth of secondary markets have a direct influence on capital allocation in the economy and the cost of funding for companies and governments. The participation of market makers is critical to supporting liquidity and the overall functioning of secondary markets. Three pillars of capital markets union We propose three complementary objectives for the CMU initiative which, taken together, should provide a comprehensive framework for action: 1. Developing more efficient and liquid markets for issuance of financial instruments A range of reforms should be pursued to promote the issuance of capital markets instruments, particularly by SMEs and midcap firms, in order to expand the capital markets and increase the choice for issuers and investors. Industry initiatives on high quality securitisation and private placement should be complemented by review of applicable regulation, especially capital requirements, as well as the Prospectus and Takeover Directives; and by review of the tax regime for SME equity, in order to promote greater equity issuance by European firms. 2. Harnessing long-term savings to promote investment CMU should improve the incentives for both institutional and retail investors to make long-term investments